Key Highlights

  • Headline inflation is expected to fall well below 2% by the middle of the year.
  • Downward pressure on capital values is polarised across sectors.
  • Real estate performance should improve following a more positive macroeconomic environment. 

UK inflation rate and Bank of England policy rate forecasts

UK economic outlook


The UK economy contracted over the second half of 2023, with gross domestic product (GDP) shrinking over the third (-0.1%) and fourth (-0.3%) quarters. Despite briefly entering a technical recession, the UK economy is expected to return to moderate growth over the course of 2024. Indeed, monthly GDP estimates for January were positive at 0.2%. Housing activity is picking up, while the return of positive real income growth has helped to boost sentiment and spending. Additional support via fiscal policy announced at the spring budget will aim to increase GDP by around 0.3% per annum. However, this exacerbates the already poor fiscal inheritance of any future Labour government and will likely require some offsetting at a later date. The effects of past tightening will also continue to define the economy, keeping supply growth muted.


The annual consumer price index declined to 3.4% in February, down from 4% in January and a peak of 11.1% in October 2022. We expect headline inflation to fall well below 2% by the middle of the year, because of base effects and lower energy prices. That said, underlying inflation pressures are likely to remain stickier. Additionally, an imbalance between wage growth and productivity growth, and the pending increase in the national living wage, provide a further risk of upward inflationary pressure as the year progresses. We believe the idea of the UK being an outlier on the upside of inflation is over, as the focus now shifts to the Bank of England (BoE) and the timing of its cuts.


At its March meeting, the BoE showed it’s more aligned in its direction to maintain monetary policy pressure than during prior months. The monetary policy committee voted 8-1 to keep borrowing costs at 5.25% and commented encouragingly on the positive direction of the UK economy. The prospect of further rate hikes has largely left investors’ minds, with the first cut expected in June. A cumulative reduction of 100 bps in the policy rate is expected during 2024. It’s worth noting that very poor supply growth means the current policy stance is more restrictive than it would normally suggest. Over time, this is likely to drive policy rates even lower to maintain productivity targets.

(%) 2021 2022 2023 2024 2025 2026
GDP 7.6 4.1 0.1 0.4 1.4 1.2
CPI 2.6 9.1 7.4 2.4 1.9 2.0
Policy Rate 0.25 3.5 5.25 4.25 3.0 2.5

Source: abrdn, March 2024
Forecasts are a guide only and actual outcomes could be significantly different.

UK real estate market overview

The decline in UK real estate capital values moderated during 2023. Despite further pressure on values, pricing movements were nowhere near the levels seen in 2022. We expect clear winners to prevail in the current environment. Meanwhile, sectors facing structural and thematic headwinds will experience sustained struggles.

According to the MSCI Quarterly Index, capital growth for all property was -2.2% over the final quarter of 2023. Offices were the biggest drag on the index at -4%, while the more resilient residential and industrial sectors led the way at -0.6% and -1.2%, respectively. Yields showed greater signs of stabilising over the first two months of 2024, according to the MSCI Monthly Index, although some further outward movement is expected to filter through, particularly in out-of-favour sectors.

Total returns dipped to -1% over the fourth quarter of 2023, driven by declining capital values. They have notably improved since the start of 2024, recording positive annualised performance over both January and February of 0.1% and 0.3%, respectively. Total returns have improved for eight consecutive months, although offices were the obvious outlier. Within all sectors, though, secondary space will continue to significantly underperform as vacancy rates remain elevated.

The investment market remains subdued as investors are waiting for the rate-cutting cycle to begin. Quarterly investment volumes were down 34% year on year, according to Real Capital Analytics. However, these volumes could pick-up quite rapidly when conditions are more favourable during the second half of this year. So far, UK investment volumes have reached £9 billion. The living sector is growing in popularity and contributed 26% of this total, while hotels were the next biggest contributor at 20%. Transactions have been particularly muted as liquidity has become a major limiting factor. Investors are waiting for an improvement in the macroeconomic environment and for more attractive stock. We expect this pattern to continue over the first half of 2024, as most investors who are not facing liquidity pressures have little motivation to sell.

We expect any areas of distress to be quite localised as debt maturities filter through, rather than because of any systemic breaches in covenants. These pockets of stress will largely be focused on poor-quality assets with significant capital expenditure requirements. Such assets could provide opportunities for cash-ready investors as the outlook for the wider market improves.

Outlook for risk and performance

UK real estate looks poised for a modest recovery following a collection of positive movements in the economic landscape. With inflation seemingly under control and the first interest-rate cuts expected in the summer, we expect to see a material increase in UK real estate performance in 2025. This period doesn’t come without risks, as any surprise in inflation data or economic activity may deter confidence in the BoE’s current path for monetary policy. In turn, real estate pricing would likely see further volatility.

Given the current environment, we expect to see investors largely remain on the sidelines for the first half of 2024. In the meantime, existing investor appetite will remain focused on high-quality assets that are benefiting from long-term thematic growth drivers. Any significant wave of distress is looking more unlikely, as occupational demand remains quite robust and strong rental growth has helped anchor real estate yields. Instead, pockets of distress are more likely within localised sub-markets or from assets suffering high vacancy rates and those requiring significant capital expenditure.

As construction costs remain elevated against real estate returns, declining levels of new supply will help to drive rental growth and performance across our forecast horizon. The polarisation trend in asset quality is set to define sectors. We expect further capital declines over 2024 from poorer-quality stock and within sectors facing headwinds. In particular, the bifurcation of offices is most apparent as secondary space has quickly fallen out of favour. In general, prime space in key locations will see the strongest rental growth, as tenants recalibrate their occupancy needs and standards during a period of slower economic growth.

Pricing should begin to look more attractive to investors in the second half of 2024. That said, monetary policy and a UK general election are still risks. We expect to see 100 basis points of rate cuts by the end of the year, encouraging investment to return to the market. Over a three-year outlook, all property returns are forecast to return to healthy levels.

UK total return forecasts from March 2024